Economic Terms in
Brief for Bank Promotion Exams, JAIIB, CAIIB

1. Gross
Domestic Product (GDP): It is the money value of all final goods and services
produced in the domestic territory of the country in a year.

2. Net Domestic
Product: obtained by reducing consumption of fixed capital (depreciation) from
the GDP.

3. Gross
National Product (GNP): It is calculated by adding net factor income from
abroad (NFIA) to GDP.

4. Law of
Demand: It states that other things being equal, more of a commodity is
demanded at a lower price and less of it at a higher price.

5. Elasticity of
Demand: It is the responsiveness of demand to a change in any factor of demand.

6. Factors
affecting elasticity of Demand: (a) Nature of Commodity (b)Availability of
substitute goods (c) Share in the total expenditure (d) Diverse uses of the
commodity (e) Consumer’s behavior etc.

7. Supply curve:
A graph of the relationship between the price of a good and the amount supplied
at different prices

8. Consumer
surplus: The difference between what a consumer would be willing to pay for a
good or service and what that consumer actually has to pay.

9. Sunk costs:
When what is done cannot be undone. Sunk costs are costs that have been
incurred and cannot be reversed.

10. Marginal
Cost: It is the addition to the total cost as a result of a unit increase in
production.

11. Propensity
to Consume: The relationship between change in income and the resultant change
in consumption.

12. Fiscal
Measures: Measures to correct excess /deficient demand through budget proposals
of government are called fiscal measures. These include tax changes, increases/reductions
in government expenditure, etc.

Part 4: TYPES OF CHARGES, SECURITIES & DOCUMENTATION with Multiple Choice Questions (MCQs) and answers

13. Fiscal
Policy: Fiscal policy is that part of government economic policy which deals
with taxation, expenditure, borrowing, and the management of public debt in the
economy.

14. Fiscal
deficit is the gap between the government’s total spending and the sum of its
revenue receipts and non-debt capital receipts. It represents the total amount
of borrowed funds required by the government to completely meet its expenditure

15. Budget
Deficit: Budget may take a shape of a deficit when the public revenue falls
short of public expenditure. A budget deficit is a difference between the estimated
public expenditure and public revenue. The government meets this deficit by way
of printing net currency or by borrowing.

16. Primary
Deficit: Fiscal Deficit minus Interest on Borrowings.

17. Inflation:  A situation of a steady and sustained rise in
general prices is usually known as inflation. Inflation is a state in which the
value of money is falling i.e. prices are rising.

18. Cost-push
Inflation: It arises due to an increase in production cost. Such type of
inflation is caused by three factors: (i) an increase in wages, (ii) an
increase in the profit margin, and (iii) the imposition of heavy taxation.

19. Deflation:
Deflation is the reverse case of inflation. Deflation is a state of falling
prices that occurs at a time when the output of goods and services increases
more rapidly than the volume of money in the economy. In deflation, the general
price level falls and the value of money rises.

20. Recession: A
period of slow or negative economic growth, usually accompanied by rising
unemployment.

21. Stagnation:
A prolonged recession, but not as severe as depression.

22. Disinflation:
A fall in the rate of inflation. This means a slower increase in prices but not
a fall in prices.

23. Depression:
A prolonged recession in economic activity. The textbook definition of a
recession is two consecutive quarters of declining output. Depression is an
even deeper and more prolonged slump.

24. Duopoly: A
market structure in which two producers of a commodity compete with each other.

25. Monopoly A
market situation in which a product that does not have close substitutes is
being produced and sold by a single seller.

26. Perfect
competition A market situation characterized by the existence of very many
buyers and sellers of homogeneous goods or services with perfect knowledge and
free entry so that no single buyer or seller can influence the price of the
good or service.

27. Buyer’s
market: A market in which supply seems plentiful and prices seem low; the
opposite of a seller’s market.

28. Tax haven: A
country or designated zone that has low or no taxes,

29. Tax
avoidance: A legal action designed to reduce or eliminate the taxes that one
owes.

30. Tax evasion:
An illegal strategy to decrease tax burden by underreporting income,
overstating deductions, or using illegal tax shelters.

31. Ad valorem
Tax: Ad valorem tax is a kind of indirect tax in which goods are taxed by their
values. In the case of ad Valorem tax, the tax amount is calculated as the
proportion of the price of the goods. Value-added Tax (VAT) is an ad Valorem
Tax.

32. Regressive
Tax: It is a tax in which rates of taxation fall with an increase in income. In
regressive taxation, the incidence falls more on people having lower incomes
than that on those having higher incomes.

33. Progressive
taxation: Taxation that takes a larger proportion of a taxpayer’s income the
higher the income is.

34. Monetary
policy: The regulation of the money supply and interest rates by a central bank
in order to control inflation and stabilize the currency.

35. HDI: HDI
(Human Development Index) is a composite index measuring average achievement in
three basic dimensions of human life-a long and healthy life, knowledge, and a
decent standard of living.

36. Engel’s Law:
This law was formulated by Ernst Engel. This law states that, with a given taste
and preference, the portion of income spend on food diminishes as income increases.  According to this law, the smaller a person’s
income, the greater the proportion of it that he will spend on food, and vice
versa.

37. Giffin
Goods: Giffin goods have a positive relationship between price and quantity
demanded and as a result demand curve of Giffin goods slopes upward from left
to right.

38. Gresham’s
Law: Bad money (if not limited in quantity) drives good money out of circulation

39. Laffer
Curve: It represents the relationship between total tax revenue and
corresponding tax rates.

40. Lorenz
Curve: The Lorenz curve is a graphical representation of the cumulative
distribution function of a probability distribution. This curve shows the
degree of inequalities of a frequency distribution in a graphical manner.

One-liner Questions and Answers for Bank Promotion Exams (Set 3)

41. Pareto
efficiency: A situation in which nobody can be made better off without making
somebody else worse off.

42. Pigou
effect: A fall in the price level increases the real value of people’s savings
making them feel wealthier and thus causing them to spend more. This increase
in demand can lead to higher employment

43. Okun’s Law:
A relationship between an economy’s GDP gap and the actual unemployment rate.
The relationship is represented by a ratio of 1 to 2.5. Okun found that an
annual 2.5% increase in the rate of real growth above the trend growth results
in a 1% decrease in the rate of unemployment.

44. Philips
Curve: Inflation and unemployment have a stable and inverse relationship. The
theory states that with economic growth comes inflation, which in turn should
lead to more jobs and less unemployment.

45. Say’s Law:
Supply creates its own demand.

46. Real
exchange rate: An exchange rate that has been adjusted to take account of any
difference in the rate of inflation in the two countries whose currency is
being exchanged.

47. Real
interest rate: The interest rate less the rate of inflation.

48. Tiger
economies: The fast-growing developing economies of Asia.

49. Tobin tax: A
proposal to reduce speculative cross-border flows of capital by levying a small
tax on foreign exchange transactions.

50. Predatory
pricing: Charging low prices now so you can charge much higher prices later.

51. PPP:
Purchase Power Parity is the exchange rate that equates the price of a basket
of identical traded goods and services in two countries.

52. Bubble: When
the price of an asset rises far higher than can be explained by fundamentals.

53. Bull: An
investor who expects the price of a particular security to rise; the opposite
of a bear.

54. Contagion:
The domino effect, such as when economic problems in one country spread to
another

55. Crowding
out: When the state does something it may discourage, or crowd out,
private-sector attempts to do the same thing. At times, excessive Government
borrowing has been blamed for low private-sector borrowing.

56. Dumping:
Selling something for less than the cost of producing it.

57. Fiscal drag:
is the tendency of revenue from taxation to rise as a share of GDP in a growing
economy.

58. Fiscal
neutrality: When the net effect of taxation and public spending is neutral,
neither stimulating nor dampening demand.

59. Hard
currency: A hard currency is expected to retain its value, or even benefit from
appreciation, against softer currencies.

60. Hot money:
money that is held in one currency but is liable to switch to another currency
at a moment’s notice in search of the highest available returns, thereby
causing the first currency’s exchange rate to plummet.